Archive for Energy efficiency

I just frittered away an hour poking holes in a 2002 paper from the American Enterprise Institute and the Brooking Institution that purports to show a net cost to society from higher CAFE standards. Even using the paper’s questionable results, my calculation show an a posteriori net benefit had CAFE standards been raised at the time the paper was written.

Jevons’ Paradox is a consequence of the downward slope of the demand curve: when the price of something falls, we tend to demand more of it. The slope of the demand curve is also known as the elasticity of demand. A gently sloped demand curve (where consumption increases rapidly with decreasing price) is said to be "elastic," while a steeply sloping demand curve (where consumption increases only slowly with decreasing price) is said to be inelastic.

I recently wrote about some research showing that the elasticity of the demand for driving has increased in recent years. That means that the effect of Jevons Paradox is becoming more significant when it comes to driving: increases in automobile efficiency that decrease the cost of driving will have the effect of increasing driving more than they would have in the past, meaning that we should not count on increases in CAFE standards (which increase the efficiency of automobiles) to do much to reduce gasoline usage. Instead, we should focus on structural changes that reduce driving by increasing its marginal cost or decrease the marginal cost of alternative modes, such as mass transit.

Micheal Giberson’s note prompted me to look at the paper on which the Economist article was based. I found that the researchers assumed that the demand elasticity for light had not changed over the last 160 years, and would not change in the future. I find this assumption highly questionable, given that the structure of the lighting market has changed greatly as technology changed from candlelight to gas light to electric light.

When candles were the primary light source, acquiring light required a lot more effort than just flipping on a light switch, and it was possible to see the light you purchased being used up as a candle burned down. Today, we would have to go outside our house (at night) and watch the meter spin to see visual evidence of the cost of light, and even then it would be difficult if not impossible to isolate the effect of the cost of light from the cost of watching TV or running our refrigerator.

Because it’s much harder today for a consumer to determine the true cost of the light he is using, I expect that consumers will be much less sensitive to changes in the price of light than they were in the past. In other words, contrary to the assumptions in the paper, demand for light has most likely become much more inelastic in recent years, and so we should not expect that increases in lighting efficiency (and the associated decreases in lighting cost) will have much effect on total light consumption.

As a long-time listener to the Stephen Lacey’s weekly podcast, I was happy to join in as he takes an in-depth look at the Renewables Gap: the question of where the energy is going to come from to power the necessary transition to a clean energy economy, an issue I looked at in Managing the Peak Fossil Fuel Transition.

I’m in great company on this podcast, so if you don’t tune in for me, you might want to know what Bill McKibben has to say about it.

No longer. I was just reading the 2009 Annual report for Green Building company PFB Corporation (PFBOF.PK.) PFB manufactures SIPS (Structural Insulated Panels) and ICFs (Insulated Concrete Forms) and in their sustainability report, they found that the energy saved by their insulation over 50 years would be approximately 130 times the energy used in its manufacture (see chart.)

Since ERoEI is a flawed measure, I also calculated the Energy Internal Rate of Return (EIRR), using both 25 year and 50 year lifespans… they worked out to be 262% and 264%, respectively. For comparison, the highest EIRR I’ve found for a energy generation technology is 205% for wood cofiring. The EIRR for a wind turbine is around 84%, and a combined cycle natural gas plant has an EIRR about 164%.

In otherwords, insulation is a slam-dunk when it comes to energy economics. That’s no surprise, but it’s nice to have some numbers, so we have a better idea of just how good a slam dunk it is.

He and I are in agreement that there’s little wrong with PACE programs in principle, but they raise some thorny issues in practice. Here are a few of his worries. Micheal says:

If PACE is just a way for homeowners to scrape up subsidies – i.e. to improve their properties and make their neighbors’ pay for it – then I’m against it.

I agree, but with a caveat: one justification for subsidies for energy efficiency is that energy efficiency has positive externalities, and creates societal benefits. To the extent that energy efficiency subsidies are societal payments for societal benefits, there is no problem with using PACE to scoop up as many as possible. In fact, it should be encouraged.

Here are some of the societal benefits of energy efficiency:

1. Lower energy consumption reduced the need to build and upgrade energy infrastructure, a cost which is borne by all.
2. Lower greenhouse gas emissions.
3. Predictable energy bills reduce bankruptcies and foreclosures, lessening the need for social services and raising property prices.
4. Less money spent on energy assistance programs.
5. Local jobs from the economic multiplier when money is not spent on fossil fuels imported from outside the region.
6. Reduction in local air pollution from local power plants.
7. Lower water use in electricity generation.
8. Lower energy prices because of reduced energy demand.
9. More total jobs because energy efficiency improvements tend to be more labor-intensive than capital-intensive energy production.

Micheal goes on to say:

If my local government was proposing such a program, I’d worry that mismanagement would lead to future obligations for non-participating taxpayers. What is the mechanism that ensures civil servants will be effective loan officers? Will they get bonuses for doing good work or just be paid the same salary and promoted on schedule whether or not the loans they approved achieve intended results?

I agree with Micheal on this one, but this all depends on the particular implementation, although I just finished reading Micheal Lewis’s excellent book The Big Short: Inside the Doomsday Machine
on the Wall Street’s role in the subprime mortgage meltdown, and so I’m compelled to point out that civil servants would be hard pressed to do a worse job extending loans to unqualified buyers than any of dozens of mortgage lenders from 2005 to 2008.

And finally:

Maybe the more interesting question is how and why the retail energy and home mortgage marketplaces became so bollixed up that a municipal-government-sponsored home-improvement-lending tax authority work-around is seen as a promising way to help consumers make sensible energy-related improvements to their homes.

Now that’s a great question. If you want to know why the mortgage market is so messed up, I highly recommend The Big Short, a book that makes highly technical subjects easy to understand. I can say that because I had to learn exactly how CDS’s on CDO’s work in order to pass my Chartered Financial Analyst exams, and I wish this book had been around back then… it would have made the task much simpler.

As for why the energy market is bollixed up, I think it has to do with lack of just about everything that improves market efficiency. The consumer energy market has limited price transparency, a lack of price information and real-time pricing, a single monopoly supplier, a lack of knowledge on the part of the consumer, regulated prices, a cost-plus pricing model for most suppliers, and subsidies for the purchase of energy for many classes of customers. With all this going against it, it’s no surprise at all that the market is so dysfunctional that civil servants as loan officers starts to sound like a good idea.

PACE financing is an important program that addresses multiple barriers to energy efficiency. First, it addresses upfront cost: although energy efficiency measures usually pay for themselves, most require an up-front investment which many people have trouble making. PACE financing also helps address split incentives. Because efficiency improvements can take several years to pay back, and most Americans move every few years, the benefits of efficiency don’t always accrue to the people who invest in them. With PACE, the loan used to make the improvement is assessed on the property, so the person who is saving money in energy costs is always the same person who is paying for the energy improvements.

Ability to pay. The lending does not need to be based on the borrower’s ability to pay, because the energy improvements improve that ability to pay. For example, Boulder Colorado’s now canceled PACE program required that the homeowner first get an energy audit, which is then used to estimate the cost savings of possible energy improvements. If the homeowner is able to pay for his or her current mortgage (which, supposedly, is based on his ability to pay), then after the energy improvements and the PACE loan, he or she should have better cash flow, and be better able to pay. In other words, PACE should improve the owner’s ability to pay, and actually strengthen the mortgage market.

Consumer protections Unlike complex mortgages, the most important thing about a PACE loan is that the monthly payment be less than the monthly savings, so they are inherently easier for consumers to understand. But if consumer protections are necessary, there’s no reason they could not be added to PACE lending programs without canceling the whole program, as the FHFA seems to want.

May not lead to meaningful reductions in energy consumption. Quite simply put, this is an attempt to throw the baby out with the bathwater. A good PACE program requires an energy audit and professional installation in order to ensure energy savings. It’s important to design PACE programs carefully, but that’s true for any lending program, or any program whatsoever.

Rather than putting a stop to all PACE lending, as has happened, good programs (such as Boulder’s) that do provide some assurance that energy savings will be achieved should continue, since they strengthen borrower’s ability to pay rather than weakening it.

Bad news for both her economic stimulus and energy efficiency. The New York Times reports that PACE (Property Assessed Clean Energy) financing for energy efficiency improvements, for which $150M in stimulus money was set aside is running into a roadblock from another arm of the government: the mortgage agencies Fannie and Freddie.